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Transparency the key word among hedge fund heads

Date: Tuesday, September 15, 2009
Author: Jonathan Ratner, Financial Post

NIAGARA FALLS, Ont. -- Holding a hedge fund conference at a casino may not be the best optics for an industry that was cast as one of the free-wheeling gamblers of the financial crisis, but players in the fledgling Canadian sector meeting in Niagara Falls this week have plenty of other things to focus on.

With investors demanding more disclosure about risk and liquidity exposure, it comes as no surprise that transparency is on the tip of everyone’s tongues at the World Alternative Investment Summit Canada at the Fallsview Casino Resort.

“Transparency is a big thing here in Canada,” Tom Hockin, chairman of the Expert Panel on Securities Regulation, told delegates to the summit, which ends Wednesday.

Canadian hedge funds may have come out of the market downturn relatively less bruised than their global counterparts, but greater investor sophistication and new regulatory requirements will bring more change to the industry as it continues to grow domestically and capitalize on international opportunities, delegates were told.

“A number of managers were hit quite hard in Canada and globally,” said Gary Ostoich, president of Toronto-based multi-strategy hedge fund Spartan Fund Management and the new chairman of the Canadian chapter of the Alternative Investment Management Association.

“Even managers that performed well ended up losing assets.”

One major change is a new registration regime (NI 31-103) that takes effect on Sept. 28. While it does not target hedge funds directly, its impact on the industry’s managers, advisors and distributors should be significant. A new category of ‘investment fund manager’ will be created, and in what Mr. Ostoich calls “a big step forward,” those who structure funds but don’t manage money will need to be registered, too. Managers will also have to register in each province of operation, and there will be capital, insurance and operational requirements.

“There is going to be a lot more need for disclosure and regulation,” said Michelle Peng, analyst at Investor Economics. “The changes will be a positive thing, but it will of course upset a lot of players in the industry as well. Those firms abiding by regulatory standards and paying attention to clients’ needs are the ones that are going to come out stronger and lead the industry.”

Conference organizer Canadian Hedge Watch estimates there are more than 100 hedge fund managers in Canada issuing close to 400 funds. Industry watchers say it remains difficult for new fund managers in Canada to raise assets, much like their peers.

“A lot of hedge funds have missed the equity rally,” said CHW vice-president Daryl Ching, noting the S&P/TSX composite is up quite a bit more than the average hedge fund in Canada year-to-date. “That’s because a lot of hedge funds went cautious after 2008. They’ve had to pay for it.”

But Mr. Ching and others are seeing a return of inflows and managers capitalizing on the opportunity.

“You’re seeing some more esoteric funds pop up and they’re testing the waters in the retail market to see if there is appetite,” he said. “Canada has been very resilient, most of the hedge funds are still around. If anything, we’ve seen growth in the industry [since the financial crisis]. There are new managers coming with unique skills sets.”

Mr. Ostoich said over the past few months he has probably met with at least 10 new managers, in addition to those who are launching additional funds. He said they are catering to more savvy investors who can now better identify what a fund offers and how it should be grouped.

Retail investors who in recent months have demanded more unique strategies, such as real estate hedge funds that focus on commercial mortgages, are looking to tap into markets that previously have been exclusively for the institutional world.

However, the institutional side continues to be a focus both in terms of high net-worth investors outside of Canada who could be attracted to Canadian funds, as well as for managers with funds outside of Canada.

“Most of the Canadian managers don’t serve Canadian investors, and most of the Canadian investors don’t buy from Canadian managers,” said Chris Holt, managing editor of alternative investment website AllAboutAlpha.com.

He said most of the largest Canadian managers tend to have a lot of international investors such as fund-of-funds and a limited amount of retail business. That leaves plenty of opportunity.

“I don’t think we’re at the peak of our growth,” said Mr. Ostoich. “I think you are seeing increased flow coming into Canadian hedge funds and I think you will always see new managers coming out with new opportunities. If those opportunities can distinguish themselves from resource-centric managers, they’ll get attention.”

Financial Post